Dow seen hitting record high -- and then what?

Analysts divided on whether the blue-chip gauge can keep rising

By

LeslieWines

NEW YORK (MarketWatch) -- Most analysts expect the Dow Jones Industrial Average to rise next week to new records. After that, the debate begins.

As the legendary average of 30 stocks
DJIA, +0.34%
traded closer to its record closing level of 11,722.98 -- set on Jan. 14, 2000 -- in the past week, and its record intraday high of 11,750.28, the arguments grew louder about whether the record will be a springboard to bigger gains, or the peak of the latest bull market.

'I think when mainstream America wakes up and sees the Dow above where it was in January 2000, people will say, "I don't want to miss out on this." '
Art Hogan, Jefferies &amp; Co.

"The Dow has the potential to pierce the highs and close above those levels at year-end," said Art Hogan, chief market strategist at Jefferies & Co. "I think when mainstream America wakes up and sees the Dow above where it was in January 2000, people will say, 'I don't want to miss out on this.' "

Peter Cardillo, chief market strategist at S.W. Bach, also expects the Dow to hit new highs, he said. But the rally is likely to sour as the fourth quarter wears on, he added.

Third is the new fourth

"Traditionally, the fourth quarter is one of the most vivacious quarters for equities, but it may not be this time." Cardillo said. "This year a lot of the strength traditionally seen in the stock market in the fourth quarter was borrowed in the third quarter."

The action on the Dow came as the dividend-adjusted version of the Dow Jones Wilshire 5000 Index
97199001
which calculates the value of all public companies traded in the U.S., also struck a new market high this past week. The new level means that an investor who bought the entire U.S. stock market on March 24, 2000, the previous high for the market, and held on to his investment and reinvested all dividends along the way, would finally have a turned a profit after more than six years. See Mark Hulbert's column.

Despite those new highs, market strategists remain divided as to whether the Dow's move represents a top to the market or is a just speck on the road toward higher levels.

Al Goldman, chief market strategist at A.G. Edwards, said that once the Dow reaches a new high it will quickly back lower, noting that buying momentum over the past six weeks has been over-heated, leaving the market over-extended.

Joe Battipaglia, chief investment officer at Ryan, Beck & Co., also thinks that the Dow will have trouble scoring further gains once it hits new high-water marks, he said.

'If you accept the government's CPI number since 2000, the Dow would have to be around 13,000 to really be where it was in January 2000.'
Peter Schiff, Euro Pacific Capital

"I think the market looks like it is exhausting itself, trying to get a new Dow record in the face of an economic slowdown, a contraction in the consumer sector and moderating profit growth," Battipaglia said. See data on the Dow 30.

Implications of inflation since early 2000

Peter Schiff, president of Euro Pacific Capital, gave the blue-chip index a better than 50% chance to surpass its nominal highs of nearly seven years ago.

But Schiff emphasized that he thinks that the inflation seen in the intervening years means that investors would need to see the Dow rise well above its early 2000 levels for any new highs to be meaningful.

"If you accept the government's CPI [consumer price index] number since 2000, the Dow would have to be around 13,000 to really be where it was in January 2000," he said.

Oil prices hold the key

A new resurgence in the crude price over the last few days also threatens the Dow's ability to move higher, according to Matthew Smith, a portfolio manager at Smith Affiliated Capital. "A lot of the recent stock-market rally was predicated on energy prices' coming down -- and they may not."

Rather than focus on the Dow, which contains just 30 stocks, investors would be better off taking their cues from the bond market, where the benchmark Treasury yield this week dropped to a seven-month low, in Smith's view.

The yield curve also has been inverted, with the 2-year note yield rising above that of the 10-year, a frequent signal of economic weakness ahead.

"The real question is: Who is telling you the truth?" Smith said. "The Dow is telling you that everything is going to be rosy, but the yield curve is telling you there are problems ahead."

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.